In order to obtain financing for my accounts receivable, must I be in charge of the accounts receivable? Well, sort of…you have to be the owner and signing authority of the corporation who has absolute control over them. Control also means, in this case, the written authority to ‘sell’ the receivables.
What? Who would want to sell their accounts receivables? And for that matter, who would want to ‘buy’ another business accounts receivable?
I know, this really isn’t some miracle as the banter above suggests, but what is serious is that there is select group of companies that may buy your accounts receivables.
Today lets quickly look at; why a company would consider selling their receivables; the real cost to sell them; the advantage to sell your accounts receivables and, what the difference is between factoring companies?
Selling your accounts receivables – debts owed to you, also known on the street as ‘factoring’ or ‘advance factoring’. Simply, monies in advance or in real terms, now, not later when the debtor (named company or person) on the accounts receivable account pays you. Selling accounts receivable is regarded by the elite financiers because of the value of money-and-time models. We’ve all heard of the expression 1 dollar today or $2 tomorrow? In this case, you can get $1.90 today – how good is that? Bottom line, the advantage to sell your accounts receivables is to keep the cash flowing and pay your labour, your mortgage and your taxes etc on time….keep the apple cart happy and sell your assets, it’s just good business sense in this scenario. Additionally, keeping your debtors happy by paying them timely keeps them coming back – one less business issue a vendor does not have to worry about or have restrictive terms imposed against you. Also, keeping vendors paid timely maintains a strong business rating that can honestly improve the EV (Enterprise Value) should you wish to sell your company.
What is the cost to factor?
First of all, it doesn’t ‘cost’ to factor your accounts receivables however, there is a back-end fee that is ‘paid’ for each receivable factored . This means, if the factoring company is paying you $9,000 for your receivable that is valued at 10,000 and the factoring company charges you 1%/month and your account receivable debtor pays the factoring company in 30 days the $10,000 on the original accounts receivable note, you will get back from the factoring company $1,000 less 1%. Wow, sounds reasonable. Would there be any other costs to factoring my accounts receivables? The answer is ‘often’ but not always. Other fee’s such as Set up fees, margin costs, base rates all vary between the factoring companies. Overall, your monthly all in costs vary between 1.0% and up depending on which factoring company you are dealing with.
Well, you’ve guessed it, there are multiple niche factoring companies. They are quite specific on who their ideal clients are …you have A,B and C type factoring companies. The difference amongst the factoring companies is who they cater too – industry, type of quality receivables they are dealing with –risk and the term to pay the debt and, finally the amount of debt they can service too. Regarding ‘term’, For instance 90 days to pay debts comes with higher terms which = higher cost (risk may vary depending on debtor of the note i.e. gov’t these days are taking longer to pay their bills…good debt, meaning low risk and low discount rate but slooooow – more expensive overall!!!) So, the cost to factor your accounts receivable between these companies is based on risk, term and quality hence, the discount fee’s charged.
Trust only an experienced financing advisor to assist your company with their factoring needs. and don’t hesitate to surf a few blogs as well…thank you for stopping in to see me today!